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https://ssrn.com/abstract=1261971
 
 

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Accounting Conservatism and the Cost of Capital: An International Analysis


Xi Li


London School of Economics

May 1, 2015

Journal of Business Finance & Accounting, Forthcoming

Abstract:     
This paper examines the role of conditional accounting conservatism in mitigating the cost of equity and debt capital in an international setting. I find that firms domiciled in countries with more conservative financial reporting systems have lower cost of equity and debt capital. I further explore the cross-sectional variation of the above relations. I find that the negative association between conditional conservatism and the cost of equity and debt capital is more pronounced in countries with stronger legal enforcement, suggesting a complementary role between conservatism and legal institutions in capital markets. I also find that conservatism only reduces the cost of debt in countries where accounting-based covenants are widely used, consistent with the argument that conditional conservatism improves the efficiency of debt contracts via accelerating covenant violations.

Number of Pages in PDF File: 43

Keywords: Cost of debt, Cost of equity, Conditional conservatism, Legal enforcement

JEL Classification: M41, M44, M47, G12, F00, G32, G38


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Date posted: September 13, 2008 ; Last revised: June 26, 2015

Suggested Citation

Li, Xi, Accounting Conservatism and the Cost of Capital: An International Analysis (May 1, 2015). Journal of Business Finance & Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1261971 or http://dx.doi.org/10.2139/ssrn.1261971

Contact Information

Xi Li (Contact Author)
London School of Economics ( email )
United Kingdom
HOME PAGE: http://www.lse.ac.uk/accounting/facultyAndStaff/profiles/Li.aspx
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